How to put a lid on rising health insurance costs without alienating your employees
One of the hottest issues managers have faced in recent years is how to get a grip on health-insurance costs. With per capita increases often running 15% to 50% per year, the stakes are getting higher all the time. Ignore the problem and your costs get out of line; slash too freely and you lose the support of dedicated people. No question it's a problem, but some smart companies are finding inventive ways to deal with it.
If the name of the game is controlling costs while getting employees to agree that's a worthy goal, then Trans-Matic Manufacturing Co., a $14-million precision metalworking company, is winning in spades. In recent months it has cut the per-employee rate of increase on its medical-insurance costs by more than 40%, saving $30,000. And while it tightened some of the more liberal features of its policy, the changes haven't set off the grumbling one might expect among its 130-plus employees.
Why? Because management did its homework. It took the time to lay out the problem and to explain why savings were necessary; it discussed proposed changes with employees long before they were to take effect. And it listened. Based on employee comments, proposals were adjusted and in some cases tabled. "Obviously," says chief executive officer Patrick A. Thompson, "it's a lot easier to send out a memo telling people what you've done. But we've found that the more employees know about something, the more responsible they are." In fact, Thompson's entire management style is based on that premise (see "Having a Say," page 2).
Over the past decade, Trans-Matic, like thousands of other employers, has tried to put the brakes on health-insurance costs through a variety of tried-and-true means. The Holland, Mich., company has long prided itself on providing comprehensive health-insurance coverage for all its employees -- and their families -- in the belief, Thompson says, that "good benefits are a tool for attracting and retaining good people." So cost reductions had never come at the expense of coverage; they came from switching insurance carriers (at least five times in 10 years); self-funding part of the risk (as of 1984); or restructuring the way the plan is administered. Three years ago, for instance, the company lowered its premium expense by about 26% when it switched third-party administrators and reinsurance companies.
But since then, opportunities for savings have been tough to find. In 1987 per-employee rates went up 21%, and in 1988 they rose another 24%. Randy L. Utting, Trans-Matic's controller for the past three years, knew there was a limit to how long the company could support these hefty increases. And he knew that limit would be reached sooner rather than later.
Our story really begins last July, when Utting got news of yet another impending increase from the company's insurance representative. It was too early to be precise, she told him, but it would probably exceed 20% again. On a per-employee basis, that meant costs would shoot from $2,100 to at least $2,500; what's more, the cost of health insurance as a percentage of payroll would go from 8% to 8.65%. So Utting, a former tax and small-business consultant with a Big Eight firm, sought ways to limit the increase. Among other things, he scoped out policies that other employers had used for years: charging employees for family coverage; increasing deductibles; boosting the number of times families have to pay deductibles. The insurance rep suggested that these sorts of changes would deliver major savings. But as Utting knew, generating a list of options was the easy part. The real trick was to sell the cutbacks to employees.
At a management meeting in August, Utting had no trouble getting the support of other managers. They did, however, want to make sure Utting wasn't too eager to save money at the expense of coverage. Thompson, for example, opposed weakening the insurance for major medical expenses. Nor did he want to begin charging employees for any part of the basic premium.
Soon after, Utting met with members of the company's employee council, an elected body that advises management on issues that are of particular interest to employees. The meeting was much more tense than he had expected. Utting went in thinking that the need for cuts would be clear and that it would mostly be a matter of working out the details. But he was wrong. As a few employees noted, Trans-Matic wasn't in any apparent financial trouble -- so why the concern about health-insurance costs? "It didn't seem like a real problem," says Duane Rotman, a veteran die setter. The issue of cutting benefits was also touchy enough that Rotman and the other employee representatives were reluctant to endorse changes without getting more employees involved. They suggested that Utting arrange a forum to explain the case for cutbacks to the whole company.
That, it turned out, was exactly the right move. On September 28 employees throughout the company met in the lunchroom to learn about the health-insurance situation. To accommodate the three shifts, one session was held in the morning and another in the afternoon. (The meeting was videotaped for those employees who work in Trans-Matic's other plant in Sanford, N.C.) During the first part of the meeting, the company's insurance rep provided an overview of the cost pressures in the health-care industry -- noting everything from the rising use of state-of-the-art technology to the treatment of catastrophic illnesses. She also talked about other businesses -- some of which, she noted, were seeing increases of more than 70% -- and measures they were taking to hold the line on costs. For the foreseeable future, she predicted, health-care cost increases wouldn't slow down; they'd continue to race ahead of inflation.
Utting then began talking about Trans-Matic's dilemma. He reviewed the company's recent increases and the 20%-plus hike slated for January 1, 1989. Then, with the help of slides, he presented a list of options under consideration -- among them, increasing the deductible and boosting the maximum amount individuals would be required to pay on their claims before expenses would be fully covered by the insurer. Nothing had been decided, he told the group. "We are looking for feedback."
A number of employees voiced their unhappiness about cutbacks under any circumstances. It was ironic, some said, that Trans-Matic was spending money to pave a parking lot at the very time it was asking people to accept benefit cuts. But eventually the criticisms faded; most people -- including skeptics like Rotman -- saw that management was, in fact, acting in the best interests of the company. "This was really a national problem," says Rotman. "It affected all of us, so it was in everyone's interest to deal with it before it became a bigger concern."
Over the next two weeks, employees were invited to voice their preferences on the various proposals to Rotman or other members of the employee council, who, in turn, passed the results along for review. Overall, people were against paying for their own insurance. But they were more open to paying three deductibles per family instead of two, or increasing the $100 deductible to $200. Based on the feedback, Utting asked his insurance rep for some bids. Ultimately, the changes he recommended were in line with what employees had asked for, although he was able to hold the increase in the deductible to $150. Once the changes were agreed to by the employee council and management, he noted them officially in a memo; they took effect on New Year's Day.
Now on the face of it, this isn't a very efficient way to run a business. Utting reckons that getting employees involved extended what might have been a one-month pro-cess to two. During the fall, he and the director of human resources spent a good deal of time developing proposals and answering questions from employees. And production stopped altogether during the companywide meetings.
Yet hardly anyone at Trans-Matic doubts that it was worthwhile. That the company has managed to limit the increase on this year's medical insurance to just 14% is only part of the payoff. More important, says Thompson, is that employees know the context -- and the motivation -- for controlling costs. Whatever happens in the future, that understanding will surely come in handy.
HAVING A SAY
At Trans-Matic, seeking feedback from employees is a way of life
Over the years, Trans-Matic Manufacturing Co. has relied on a management style, based on the Scanlon Plan, that encourages employee participation. By running things this way, explains chief executive Patrick Thompson, "We end up with better decisions." And employees feel more committed to making things work. Some recent examples:
* Last year, when the company was planning a 25,000-square-foot addition to its main facility, the blueprints were pinned on a bulletin board for study and comment by employees. One supervisor noted that the normal-size door openings wouldn't accommodate some machines on order; a toolmaker suggested that the toolrooms be outfitted with washbasins. Both ideas were incorporated into the final design.
* As the mix of business changed and profit margins narrowed, the old bonus formula had become outdated -- it was almost impossible to earn a bonus, Thompson says. So a committee of managers and employees was charged recently with developing a more realistic plan.
* Last summer, the vice-president of operations and the controller wrote a memo announcing a "new profit improvement program" and posted it on the bulletin boards. Employees raised a fuss that the plan had been designed without any input from them. "It was perceived as a little authoritarian," recalls Thompson. So the memo came down. When the matter is revisited this winter, employees will have their say.
Managing a company this way has its difficulties. "There's always an expectation that employees will be involved," notes Thompson. And if they're not? Well, as the last example indicates, management hears about it.
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